I recently delivered a webinar for Bookmap (available on youTube here). During the Q&A, one thing that became clear was how, for many retail traders, their approach is nothing more than throwing darts in the dark.
This particular webinar was on the subject of analysing trade statistics to help us improve our trading. I explained how in order to make the necessary adjustments to our trading we need to understand a base set of data for our style of trading. We need to specifically know what a good trade looks like when viewed through statistics and why it should look like that. This is something we should be taught when learning a particular style of trading and is certainly a big part of the Norden Method tuition.
If you don’t understand specifically what a good or bad trade looks like then you can be guilty of what Annie Duke terms ‘resulting’; where we measure whether something is good or bad by the result. So, trades that are profitable will be deemed ‘good’ while losing trades are ‘bad’. The trader will then look to copy the ‘good’ winning trades.
The problem with resulting is that not all winning trades are good and not all losing trades were bad.
For example, what if a trade went 10 ticks against me early on but the market turned around and I made a 2 tick profit? Is that a good trade?
It’s a winning trade but I would suggest it isn’t a good one. Whatever the dynamics of that trade were I wouldn’t be in a hurry to repeat it.
Differences in methods
Different trading styles may have different qualities and will look different when analysed through data. Norden Method trades are held for just a few seconds while swing traders may hold trades for an hour or more. therefore ‘good’ and ‘bad’ trades might look different for each (although there are some factors that will apply to both).
That is why it is essential we have a baseline understanding of what our style should be like.
Throwing darts in the dark
As the host of the Bookmap webinar rightly stated, most retail traders don’t have such a baseline understanding. Many don’t even analyse their trading statistics properly. Those who do, without the correct baseline knowledge, will then proceed to tweak various aspects of their trading without knowing if they are moving closer to or further away from a good trade.
They are throwing darts in the dark.
This can be a never ending process, riddled with frustration and highs and lows. The trader thinks they are improving only to find themselves go backwards again.
This is exactly what happened to me when I first started to play golf and was trying to teach myself (based on what I saw and heard on TV and from friends).
I only saw sustained and sustainable improvement once I visited a professional and received the correct baseline information.
Analysing your trade data is essential to help you improve your trading. However you can only improve if you know where your data should be heading. Otherwise you are playing a game of hit or miss which can take up years of time.
Just like throwing darts in the dark, sometimes you will hit upon something good but it will likely be through accident and be hard to replicate.
By understanding what good and bad trades really look like for your style of trading, you will be able to make the correct adjustments and move your trading forward.
Whoever you learn to trade from, they should be able to specifically tell you this information. Avoid people who tell you that winning trades must be good and losing trades are always bad and who only analyse your trades from that perspective.
Responding to feedback is essential to improving your trading. Make sure it is a key part of your process and that your process is robust.